Why Does Custom Software Cost So Much?

After nearly 20 years writing custom software, mostly for corporations in IT departments, there is nearly a uniform meme I encounter among those who sponsor projects that involve custom software development:

“Custom software costs too much!”

There are stories, anecdotes, studies, and all sorts of experience about how software development schedules that go over time, well over budget, and fail to meet expectations.  Far more seldom are stories that talk about how software was delivered in less time than was estimated.  It should be no surprise that, despite the fact that corporations are sitting on more cash than they ever have in corporate history, companies are still skittish about embarking on new custom development projects.

This, of course, is not new.  This has been a theme in software development even far before Fred Brooks wrote The Mythical Man Month.  What is surprising to me – is how this condition survives even despite things like agile and lean coming to the fore.  Yes, its true, even in purported agile and lean projects, there is a great variability in productivity that, when combined with a tendency to budget and plan based on best case scenarios in corporate IT, result in far too many late and over budget projects.  Agile and lean help – indeed, are the right direction (this is one of the reasons I work for ThoughtWorks!). However, they are not a silver bullet.  The reality is that, despite everything we try to do to mitigate risks with agile and lean, project sponsors are rightly concerned with the level of risk they see as inherent in software projects.  As a result, they are going to use levers available to them to manage these risks.

Levers Used to Manage Risk

So what levers do investors have in order to manage risk?  The ones that most use tend to be:

  • Manage using process controls (scope management, quality gates, governance, PMBOK, ITIL)
  • Manage down the invested capital at risk

What happens when you pull these levers?  Well, sadly, this is what you tend to get:

  • Waterfall software development, often fixed bid, with strict “de jure” scope control with the real “de facto” scope additions added through a back-channel.
  • Attempt to get lowest cost per developer hour.

While this does not occur in more enlightened organizations that likely understand the fact that not all “developer hours” are the same, the sad fact is that most organizations lack such enlightenment.  It is easy to imagine why this occurs.  If you are a CIO managing a 2000 person IT department, part of your bias is going to be that you, being a smart CIO and all, have such a large organization for a reason.  At this level of corporate politics, not only is your prestige buried in the size of your department, but the idea that you have 80% more people than you might need is, to put it simply, heretical.  Given that such heretics that “rock the boat” tend to have short careers in high level corporate IT, it is not surprising that the such “resource oriented” ways of thinking predominate the conversation at the highest levels of IT.

Why These Levers Fail

Not all failure is the same.  And not all failing is bad.  The problem is when we fail to learn from failure.  And the way these levers fail, then tend to encourage the kind of failure you don’t learn from.  The kind of failure that begets more failure rather than begets learning from mistakes.

How the Hourly Rate Lever Fails

Let us take on failure that results when you try to succeed through usage of the cost reduction lever.  A common way this gets sold is when there is a vendor management group – especially one where the leading VP is bonused strictly on lowering rates – that wields a lot of power in an organization.  The presence of companies selling developers chiefly on the basis of rate attests to the fact that there is a market for this.  You do not have to look hard for this – much of the market for offshore development caters to this group.  Not to be outdone, there are many first world (US in particular) based companies that try to play the low end of the market.

However, another source of “search for the lowest rate” surprisingly comes from initial (and often feeble) attempts to try to get estimating right as a result of a failed waterfall project.  If the last project failed, the chances are, the next round of estimating will be much more conservative.  The conservative estimate, often higher than initial budget expectations, causes the sponsor to try to drive down the unit cost per hour.  Remember, in such a situation, the hour is perceived as the fixed quantity.  This attempt to fit a large number of hours into a fixed budget also is a large source of project sponsors trying to pull the hourly rate lever.

Predictably, these kinds of moves fail.  When you go lower on the rate scale, you tend to get less qualified software developers.  While there is a lot of corporate hubris tied into the fiction that there is some magical source of low cost developers that are otherwise brilliant and able to achieve results above their pay grade, seldom do such moves tend to work out.  Low cost shops tend to have lots of turnover because of low wages – good developers are not stupid, and will not tolerate low wages for long.  Beyond this, of course, low cost shops tend to underestimate work as well, because they often compete with other low cost shops.  It is a race to the bottom, ironically, that causes even more project failure.

The result of all this is, of course, chasing low-cost development tends to cause a self-reinforcing failure cycle.  Project fails, next project has longer estimates, sponsor does not want to spend more money on failure, leading to the next push to drive rates even lower.  This continues until the organization loses any faith in any ability to write software at all.  The only thing that stops this is, literally, company bankruptcy, acquisition, or a major change in management at the top of IT (if not the CEO) so that the negative feedback cycle can be broken.

How the “Strong Process” Lever Fails

One step up from project sponsors who will hit the cost lever like a mouse hitting a lever in a skinner box are the project sponsors who put their full faith in processes, such as those proscribed by the PMBOK or recommended by ITIL to solve their cost problems.  The thought is that – if only we could get a better plan, and stick to the plan, we could get better at predicting the cost of software.

The chief thing that such frameworks try to do is to do strong change management, contracted service levels, and detailed planning in order to achieve the end of predictable software development.  This approach, of course, leads to several problems that are well understood by many people in the Agile and Lean communities but certainly bear repeating:

  • Software development itself, particularly when done with business analysts, frequently leads to discoveries.  As Mary Poppendeick once pointed out, the most valuable feedback for changes to software comes at the latter end of a project, when the group analyzing and developing the software best understands the domain.  Traditional processes tend to consider these late changes the most costly, seeking to minimize the highest value work.
  • Velocity is deeply variable based on factors that management usually does not want to talk about.  A good software developer can be 10 times more effective than an average software developer.  Other environmental factors that have little to do with the presence of a prescriptive process can cause additional wild swings.  A future article in this series will go into more detail about how potential swings in velocity are an order of magnitude more significant than the swings in “cost per hour”.

Proscriptive plans that try to predict cost and schedule without understanding the individuals, service climate, DevOps maturity, and multitude of other variables that can affect the speed of software development will surely fail.  The simple fact that corporate budgeting processes select for optimistic thinking most of the time leads to assuming that simple program that consists of 4 main screens will take 8 weeks rather than 8 quarters.

Why is this a cycle of failure?  Well – what happens is that you bring PMBOK, ITIL, or some other “capital-P” Process in, and it fails.  Because such processes tend to be more accepted by the corporate finance community, the reaction to a failed project tends to be “we didn’t do enough process control”, rather than “we did too much”.  The next round of projects tend to have more detailed estimating and stronger change control.  There are stories that I personally know of requirements efforts that are measured by years, rather than weeks.

What Levers Remain?

There are levers that go far too much underused.  In my experience, they are as follows:

Manage Project Duration Down

In general, prefer smaller projects to larger ones.  Predictability works better when the team is smaller and the timeframe is short.  I can almost decently predict what one team of 8 people will complete in an iteration if I know all the people, skills, and modes of working on that team.  I, personally, am a believer in doing lots of small things rather than one big thing – as it allows for a faster feedback cycle and overall a less risky investment.  However, there are many projects – some of the most interesting ones – that will never be small budget, short duration projects.  This leads to the lever I use when I can’t manage duration down:

Manage Velocity Up

I have seen a team of 6 people deliver in 7 months in one company the same amount of work I have seen 150 people deliver in 2 years in other companies.  And I am not alone, I have talked with others in this business, and nearly everyone I talk to has either seen, or worked on one of these very effective software development teams.

Velocity matters.  It is hard to measure productivity the way you measure a person’s shoe size, but you can sure manage relative productivity over a long period of time.  The perception that software costs too much is, in my opinion, one of the factors holding back the global economy from expanding.  In any large company, any decent developer,  would be shocked at the waste involved in many business processes – waste that could be eliminated by better software implementation.  There are companies that will not change commission plans, product offerings, or even product pricing to be more profitable, chiefly because of software constraints.  If you think software does not have a serious effect on both the opportunities or limitations of a company, you literally must not be paying very much attention.

What’s Next?

In this series of upcoming posts, I am going to explain various factors that affect velocity, and how you can optimize them in a manner that does not sacrifice quality.  Factors that, when understood and properly managed, can mean the difference between a flexible company that can respond to market conditions, and a company whose technology that does not allow it to run so much as a second shift when demand ramps up.

Stay tuned…

Why Does Custom Software Cost So Much?

5 thoughts on “Why Does Custom Software Cost So Much?

  1. “It is a race to the bottom” – like people selling go karts on ebay, same model, same manufacture, each trying to be cheaper than the next. People use short term profit as the most important metric, which just as ironicly as ’causes even more project failure.’ , it is more expensive in the long run. Cheaper is not better, so when are people going to understand this? Great read / info, as always.

  2. Regarding “Strong Process” – This quote says it best “Everyone has a plan, until they are punched in the face” – Matt Hugh MMA World Champion Cage Fighter. Metaphorically speaking it’s true. The best plans fall apart, and it’s what you do reaction wise that will keep you moving forward successfully. It comes with knowledge, experience, and most importantly, time.

  3. I’m impressed, I must say. Really rarely do I encounter a blog that’s both educative and entertaining, and let me tell you, you have hit the nail on the head. Your idea is outstanding.

  4. robmypro says:

    I really enjoyed reading this, Aaron. I have faced many of the issues you mentioned over 20 years at my custom software company (http://www.myprogrammer.com). The client has a right to understand what the project will roughly cost. They also have the right to know approximately what functionality they will receive for that budget. The key is accountability. And trust.

    As you rightly point out, agile is the right direction. We have bi-weekly reviews with our clients to make sure things stay on track, and to verify that we are building the right product. It is a collaboration. Costs do tend to rise a bit, but the client will rarely get upset with a 10-20% budget miss – if the product works really well. Even taking a month or two longer than planned is rarely questioned.

    The key to a happy relationship is building a good piece of software, without completely blowing the schedule or budget. I think most clients are really good about it, as long as you earn their trust, and confidence.

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